Wednesday, February 23, 2011

"THE BERNANKE PUT AND INSTABILITY IN COMMODITY MARKETS"

From Pragmatic Capitalism:

The Fed has not been shy about taking credit for the recent equity price increases. They claim that this so-called “wealth effect” will spill over into the real economy and create a “virtuous cycle” where nominal wealth creation leads to real wealth creation (they have that part backwards – real wealth creation leads to nominal wealth creation, but who needs facts anymore?). But the Fed has also been quick to claim no part in the recent commodity price spike (also no mention of the continuing house price declines, but again, who needs all the facts when you can better prove your point by leaving most of the facts out of the equation?).

The recent bout of inflation in China and the floods in Australia have laid the perfect foundation for a fundamentally driven rally in many commodities. Add in the Fed’s direct message to buy risk assets and you have all the ingredients for rampant speculation. To believe that this speculation is stopping at equities is naive at best. The fundamental story in the emerging markets and hence the commodity markets is far superior to the modest growth story in most US equities. So, it’s only natural so see investors pouring into the commodity markets with the expectations of higher gains on the misconception of the Fed’s “money printing” and a sound fundamental backdrop.

The problem is, investors and speculators are taking the Fed’s words to heart and they are acting on them....MORE